Question

PLEASE DETERMINE THE RESEARCH QUESTIONS FOR YOUR CLIENT HALL WINERY? {EXAMPLE:when or how should Hall winery report ____ on the income statement? , What value should they report for Income statement?, when or where should they ___ on the B/S or I/S? ETC}

Hall Winery Hall Winery (the Company) is a privately-owned company that manufactures wine in the Napa Valley. The company controls the entire wine-making process from growing the grapes to bottling the wines for sale. Last year (2018) the Company had operating income of $3,055,125. The winery consists of 270 acres of vineyards and a facility which wine is processed and stored. The vineyard is able to produce 500 bottles of wine per acre, and the company has traditionally been able to sell each bottle for $65. The vines were purchased from a nursery for $4 million and cost an additional $2 million to plant. The vines were planted in 2011 and required 3 years to develop to the point of producing grapes. The annual cost incurred during the development period was $1.75 million which includes stakes, wires, labor, and watering. The vines will continue to produce grapes for an additional 20 years after they begin producing grapes. The cost to remove and dispose of the vines after grape production ceases is approximately $1 million. Grapes are harvested each year in March and processing into wine occurs over 3 years. The wine making process consists of 3 stages. The first stage is harvesting the grapes, smashing them into a liquid, and placing the liquid in barrels (takes 2 months to complete and costs $400,000). The second stage is the fermentation process where wine is stored in the barrels (takes 32 months and costs $1.5 million). In the third and final stage, wine is bottled and packaged for sale (takes 2 months to complete and costs $600,000). Hall winery initially records all costs of the wine making process as inventory which is valued using the LIFO method. The Company also incurs annual costs of $600,000 to maintain the soil and irrigation pipes of the vineyard. This cost is reported on the income statement as maintenance expense. Each annual batch of wine produced by the company is usually entirely sold off by the time the next year's wine making process begins. In March of 2019, a new crop of grapes started to grow that was expected to be harvested in March of 2020. However, in December of 2019, a wildfire occurred in the Napa Valley. Unfortunately, the entire vineyard suffered severe smoke-damage. The company brought in wine experts to assess the damaged vineyard once the fire was extinguished. The wine experts determined that the future annual output of the grape vines would certainly decrease by 75%. Additionally, it is probable that the remaining useful life of the grapevines will decrease by 30%. The quality of grapes produced in future years will not change, however it is more than likely that the wine (sold in 2023) made from grapes (on the vine in 2019) exposed to the fire will sell for 50% less than Hall's wine traditionally does. The costs of the wine making process will also decrease by 20% due to a reduction in the quantity of grapes produced. Determine the research questions for your client Hall Winery.

Answer 1

Findings at Hall Winery:

1. Hall Vinery has a capacity to produce and sell 125000 bottles , every year
2. The annual sale value is approx $ 8125000
3. The Operating Cost for 2018 given is $ 3055125.
4. The annual cost of depreciation is $ 337500 – till 2018 ( working attached )
5. The Cost of Production is $ 3100000 ( working attached)
6. The wildfire occurred in Dec,2019 has major impact as mentioned now
7. The output will reduce by 75% and it will be around 31250 bottles for 2019
8. The Depreciation will increase to $ 484142.9 as the useful life has been reduced by 30 % and now it is 14 years
9. The sale price is also going to be half of the last year , due to Fire impact and it will fetch only $ 32.50 per bottle
10. However, till Dec,19 , Hall Winery has spent around 821000 cost . First stage completed $ 400000 . Second stage which required 32 months, the cost of 9 months till Dec,19 is 421875. Third stage has not yet begin.
11. However, still the whole process of making wine , which stands at $ 3100000 , will also reduce by 20% and shall be $ 2480000
12. The Quality of wine shall not be impacted due to fire, as confirmed by the experts.
13. This wildfire impact has resulted into loss in year 2019
14. The amount of loss shall be $ around 19.5 million ( working attached )
15. There is no mention of the Insurance coverage clause. Hence the entire amount is the loss by Hall Winery.
16. They have to take this loss to P&L.

Note - All figures are in $

Purchase cost of vineyard			4 million	4000000
Plants			2 million	2000000
Planted in	2011	required 3 years to develop
Annual cost for development			1.75 million	1750000
Life of vineyard		20 years
Disposal of vine cost			1 million	1000000

	Existing	Change
Depreciation
Cost	6750000	6750000
Useful life	20 years	14
Depreciation SLM	337500	482142.9

	Impact of fire				Normal
Annual Production Capacity	125000	Bottles			8125000
Sale value			1015625
Future output 75% less	31250	Bottles
Depreciation cost			484142.9		337500
Selling price at 50%	32.5
Cost of wine making process			2480000		3100000
					4687500

Operating Profit for year 2019
		Expected Sale value		1015625
		Cost of winemaking		2480000
		Depreciation		484142.9
		Operating Income		-1948518